Why Should We Care About Rising Inequality?

I’ve been asked this question by a few people recently, none of them hardhearted let-them-eat-cakers. If I’m hearing them right, they’re asking two simple yet profound questions:

Why should we care if those at the top have a lot (and more all the time), as long as those at the bottom have enough?

And because of the productivity gains, innovation, and progress you talk about, isn’t it getting easier and easier over time to have enough, even if you’re at the bottom of the income/wealth distribution?

These questions deserve a thoughtful answer. So here’s mine, presented very briefly and with links to work I’ve relied on. I don’t pretend to be an expert on issues of income and wealth distribution and their consequences, but in the course of my work on technological progress and its implications (discussed often in this blog and summarized in Race Against the Machine, which I wrote with Erik Brynjolfsson) I’ve read a bunch on the subject and talked with a lot of folk who know it well. Here’s what I’ve learned: We should care a great deal about high and rising inequality for three sets of reasons: economic, political and social.

Economic Reasons

Some very important things are still expensive, and getting more so over time. Here’s a graph produced by economist Jared Bernstein (full presentation here) showing that housing, education, and health care — three biggies — have increased in price far more than middle class family income over the past 20+ years.

It’s true that some things, especially digital ones, have gotten much cheaper and much better over time. If the world’s richest people in 1960 were transported to a middle class house today, they’d be struck dumb by the flat-screen TV, smartphones, and laptops. They’d also be flabbergasted by a trip to the supermarket, drugstore, or hospital. I don’t mean to downplay this progress at all. But the house itself is getting more expensive, and the trip to the hospital is getting further out of reach for many because health care status is so closely tied to employment status in America.

Many people at the bottom have little or no economic cushion to see them through an unexpected expense (like a car or house repair) or short period of unemployment. Annamaria Lusardi, Daniel J. Schneider, and Peter Tufano asked people about “their capacity to come up with $2,000 in 30 days.” I find their results shocking.

Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans… [In other words, we] find that nearly half of Americans are financially fragile… [A] sizable fraction of seemingly “middle class” Americans… judge themselves to be financially fragile.

In short, it does not look like those at the bottom have enough.

Societal Reasons

Inequality is eroding the American dream of equal opportunity and social mobility. As my MIT colleague David Autorputs it

If the U.S. has a civic religion, it is our belief that society should be meritocratic — everyone should have a fair chance at success based on their smarts and their hard work. As the inequality of household resources becomes more skewed, the likelihood that kids starting at the bottom get a decent shot at the top gets more remote… if you walk the campuses of most top colleges in the U.S., you will discover that the vast majority are from upper income households. You don’t have to take a moral stance on inequality per se to be deeply worried that this may ultimately inhibit the American ideals that bind us together. Inequality within reason is a good thing; it creates incentives so that people work hard to reap rewards. But if more inequality today reduces the equality of opportunity for the next generation by skewing the playing field and disequalizing opportunities faced by kids from low v. high income households, that’s a tradeoff that many people would not want to make.

We Americans pride ourselves on having greater social mobility than sclerotic, ossified Europeans, but recent research shows that that pride is badly misplaced. As The Economist summarizes

Back in its Horatio Alger days, America was more fluid than Europe. Now it is not. Using one-generation measures of social mobility—how much a father’s relative income influences that of his adult son—America does half as well as Nordic countries, and about the same as Britain and Italy, Europe’s least-mobile places.

People at the bottom are living different and less healthy lives than those at the top. I don’t share Charles Murray‘s politics, but respect how he digs deep into the data. He’s summarized sharply diverging trends at the top and bottom of the American middle class in his book Coming Apart. In my recent TED talk (video up soon, I hope) I showed some of his results, using the stereotypical workers ‘Ted’ at the top and ‘Bill’ at the bottom. Here are the relevant slides

I should point out that there’s an active debate about the causes of this divergence. Murray and others think that it stems from an erosion in values among the Bills of the country. Another school of thought (the one in which I place myself) holds that the erosion of work opportunities for Bill is the prime driver. We’ll hopefully get clarity on this critical question with more time and study.

But the real reason to worry about [economic inequality] is not the unfairness of it all… The problem is that economic inequality often comes bundled with inequality of opportunity and political inequality…

Prosperity depends on innovation, and we waste our innovative potential if we do not provide a level playing field for all: we don’t know where the next Microsoft, Google, or Facebook will come from, and if the person who will make this happen goes to a failing school and cannot get into a good university, the chances that it will become a reality are much diminished…

The real danger to our prosperity lies in political inequality. The U.S. generated so much innovation and economic growth for the last 200 years because, by and large, it rewarded innovation and investment. This did not happen in a vacuum; it was supported by a particular set of political arrangements — inclusive political institutions — which prevented an elite or another narrow group from monopolizing political power and using it for their own benefit and at the expense of society. When politics gets thus hijacked, inequality of opportunity follows, for the hijackers will use their power to gain special treatment for their businesses and tilt the playing field in their favor and against their competitors. The best, and in fact the only, bulwark against this is political equality to ensure that those whose rights and interests will be trampled on have a say and can prevent it.

So here is the concern: economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain a greater economic advantage by stacking the cards in their favor and increasing economic inequality yet further — a quintessential vicious circle. And we may be in the midst of it.

Anyone still not worried? If so, I’d love to hear why.

p.s. I realize that many of my sources have a center-left political orientation. In particular, I got a lot from this column by Thomas Edsall (who has interviewed and quoted me) and the Joseph Stiglitz-moderated New York Times series “The Great Divide.” If anyone would like to point out good counterarguments from the right (or anywhere else) I’d be eager to read them.